FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
-------------------------
Commission File Number 1-12541
Atchison Casting Corporation
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
- --------------------------------- --------------------------------------
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 South Fourth Street, Atchison, Kansas 66002
- --------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 367-2121
Not Applicable
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements from the past 90 days. Yes X . No .
-- --
There were 7,644,180 shares of common stock, $.01 par value per share,
outstanding on November 11, 1999
PART I
ITEM 1. Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30,
1999 1999
---------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,821 $ 4,222
Customer accounts receivable, net of allowance for 82,729 83,235
doubtful accounts of $585 and $591, respectively
Inventories 65,851 68,777
Deferred income taxes 2,197 1,988
Other current assets 23,226 18,829
---------------- ----------------
Total current assets 176,824 177,051
PROPERTY, PLANT AND EQUIPMENT, Net 151,319 150,056
INTANGIBLE ASSETS, Net 32,449 32,846
DEFERRED FINANCING COSTS, Net 608 660
OTHER ASSETS 12,680 15,153
---------------- ----------------
TOTAL $ 373,880 $ 375,766
================ ================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
(In Thousands)
September 30, June 30,
1999 1999
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 39,665 $ 39,452
Accrued expenses 41,363 43,130
Current maturities of long-term obligations 8,838 8,833
---------------- ----------------
Total current liabilities 89,866 91,415
LONG-TERM OBLIGATIONS 106,313 104,607
DEFERRED INCOME TAXES 17,435 17,334
OTHER LONG-TERM OBLIGATIONS 2,698 3,969
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS 6,646 6,889
OVER COST, Net of accumulated amortization of $2,333
and $1,776, respectively
POSTRETIREMENT OBLIGATION OTHER THAN PENSION 8,431 8,278
MINORITY INTEREST IN SUBSIDIARIES 1,874 4,205
---------------- ----------------
Total liabilities 233,263 236,697
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 - -
authorized shares; no shares issued and outstanding
Common stock, $.01 par value, 19,300,000 83 83
authorized shares; 8,266,882 and 8,259,603
shares issued and outstanding, respectively
Class A common stock (non-voting), $.01 par value,
700,000 authorized shares; no shares issued and
outstanding - -
Additional paid-in capital 81,276 81,216
Retained earnings 65,623 65,011
Accumulated foreign currency translation adjustment (317) (1,193)
---------------- ----------------
146,665 145,117
Less shares held in treasury:
Common stock, 622,702 and 622,702 shares, respectively, at cost (6,048) (6,048)
---------------- ----------------
Total stockholders' equity 140,617 139,069
---------------- ----------------
TOTAL $ 373,880 $ 375,766
================ ================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Three Months Ended
September 30,
------------------------------------------
1999 1998
---------------- ----------------
NET SALES $ 109,693 $ 116,576
COST OF GOODS SOLD 96,980 102,655
---------------- ----------------
GROSS PROFIT 12,713 13,921
OPERATING EXPENSES:
Selling, general and administrative 9,768 10,963
Amortization of intangibles (157) 257
---------------- ----------------
Total operating expenses 9,611 11,220
---------------- ----------------
OPERATING INCOME 3,102 2,701
INTEREST EXPENSE 2,234 1,972
MINORITY INTEREST IN NET LOSS (9) (8)
OF SUBSIDIARIES
---------------- ----------------
INCOME BEFORE INCOME TAXES 877 737
INCOME TAXES 265 400
---------------- ----------------
NET INCOME $ 612 $ 337
================ ================
NET INCOME PER COMMON AND
EQUIVALENT SHARE:
BASIC $0.08 $0.04
================ ================
DILUTED $0.08 $0.04
================ ================
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT
SHARES OUTSTANDING:
BASIC 7,636,981 8,139,140
================ ================
DILUTED 7,640,719 8,151,523
================ ================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended
September 30,
---------------------------------------
1999 1998
---------------- ----------------
NET INCOME $ 612 $ 337
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
Foreign currency translation adjustments 876 (33)
---------------- ----------------
OTHER COMPREHENSIVE INCOME, BEFORE TAX $ 1,488 $ 304
INCOME TAX EXPENSE (BENEFIT) RELATED TO
ITEMS OF OTHER COMPREHENSIVE INCOME - -
---------------- ----------------
OTHER COMPREHENSIVE INCOME, NET OF TAX $ 1,488 $ 304
================ ================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)
Three Months Ended
September 30,
----------------------------------------
1999 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $612 $337
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 3,359 3,212
Minority interest in net loss of subsidiaries (8) (12)
(Gain) loss on disposal of capital assets 50 (44)
Deferred income taxes 133 45
Changes in assets and liabilities (exclusive of effects of
acquired companies):
Receivables 1,869 (194)
Inventories 4,055 (595)
Other current assets (4,130) 552
Accounts payable (597) (1,319)
Accrued expenses (2,650) (2,374)
Postretirement obligation other
than pension 153 160
Other 127 (734)
---------------- ----------------
Cash provided by (used in) operating activities 2,973 (966)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,904) (6,896)
Payment for purchase of net assets of subsidiaries,
net of cash acquired - (13,009)
Proceeds from sale of capital assets 26 551
Payment for investments in unconsolidated subsidiaries - (150)
---------------- ----------------
Cash used in investing activities (3,878) (19,504)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 60 58
Payment for repurchase of common stock - (2,929)
Payment for purchase of stock in subsidiaries (2,408) (358)
Payments on long-term obligations (4,349) (2,918)
Net borrowings under revolving loan note 6,060 26,000
---------------- ----------------
Cash provided by (used in) financing activities (637) 19,853
EFFECT OF EXCHANGE RATE ON CASH 141 80
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ($1,401) ($537)
CASH AND CASH EQUIVALENTS, Beginning of period 4,222 9,336
---------------- ----------------
CASH AND CASH EQUIVALENTS, End of period $2,821 $8,799
================ ================
See Notes to Consolidated Financial Statements.
ATCHISON CASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company
for the year ended June 30, 1999, as included in the Company's 1999
Annual Report to Stockholders.
The accompanying unaudited consolidated financial statements include
all adjustments (consisting only of normal recurring accruals) which,
in the opinion of management, are necessary for a fair presentation of
financial position, results of operations and cash flows. Results of
operations for interim periods are not necessarily indicative of
results to be expected for a full year.
Certain September 30, 1998 amounts have been reclassified to conform
with September 30, 1999 classifications.
2. Inventories
As of
--------------------------------
Sept. 30, June 30,
1999 1999
---------- ---------
(Thousands)
Raw materials $ 9,362 $ 10,414
Work-in-process 41,824 41,431
Finished goods 10,554 12,736
Deferred supplies 4,111 4,196
---------- ---------
$ 65,851 $ 68,777
---------- ---------
---------- ---------
3. Income Taxes
The provision for income taxes consisted of:
Three Months Ended
Sept. 30,
1999 1998
-------- --------
(Thousands)
Current:
Domestic $ (236) $ 132
Foreign 368 223
-------- --------
$ 132 $ 355
Deferred:
Domestic $ (127) $ 10
Foreign 260 35
-------- --------
$ 133 $ 45
-------- --------
Total $ 265 $ 400
-------- --------
-------- --------
4. Additional Cash Flow Information
Three Months Ended
Sept. 30,
1999 1998
-------- --------
(Thousands)
Cash paid during the period for:
Interest $ 2,480 $ 2,417
-------- --------
-------- --------
Income Taxes $ 869 $ 2,292
-------- --------
-------- --------
5. Earnings Per Share
Following is a reconciliation of basic and diluted EPS for the
three-month period ended September 30, 1999 and 1998, respectively.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Weighted
Average Earnings
Net Income Shares Per Share
---------- --------- ---------
Basic EPS
Income available to
common stockholders $ 612,000 7,636,981 $ 0.08
Effect of Dilutive Securities
Options 3,738
----------- --------- ----------
Diluted EPS $ 612,000 7,640,719 $ 0.08
----------- --------- ----------
----------- --------- ----------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Weighted
Average Earnings
Net Income Shares Per Share
------------ ------------ -----------
Basic EPS
Income available to
common stockholders $ 337,000 8,139,140 $ 0.04
Effect of Dilutive Securities
Options 12,383
------------ ------------ -----------
Diluted EPS $ 337,000 8,151,523 $ 0.04
------------ ------------ -----------
------------ ------------ -----------
6. Jahn Foundry Corp. Industrial Accident
An accident, involving an explosion and fire, occurred on February 25,
1999, at Jahn Foundry Corp. ("Jahn"), a wholly-owned subsidiary of the
Company located in Springfield, Massachusetts. Nine employees were
injured and there have been three fatalities. The damage was confined
to the shell molding area and boiler room. The other areas of the
foundry are operational. Molds are currently being produced at other
foundries as well as Jahn while the repairs are made.
Although no lawsuits have been filed, a number of attorneys
representing the injured and deceased employees have contacted Jahn
regarding possible litigation. The Company carries insurance for
property and casualty damages, business interruption, general liability
and workers' compensation for itself and its subsidiaries. The Company,
its property insurance carrier and its insurance broker dispute the
amount of property insurance available for property damages suffered in
this accident. If this dispute cannot be resolved amicably, the
Company would vigorously pursue its remedies against both parties.
The Company recorded a charge of $450,000 ($750,000 before tax) during
the third quarter of fiscal 1999, primarily reflecting the deductibles
under the Company's various insurance policies. At this time there can
be no assurance that the Company's ultimate costs and expenses
resulting from the accident will not exceed available insurance
coverage by an amount which could be material to its financial
condition or results of operations.
Following the accident, the Occupational Safety and Health
Administration ("OSHA") conducted an investigation of the accident. On
August 24, 1999, OSHA issued a citation describing violations of the
Occupational Safety and Health Act of 1970, which primarily related to
housekeeping, maintenance and other specific, miscellaneous items.
Neither of the two violations specifically addressing conditions
related to the explosion and fire were classified as serious or
willful. Without admitting any wrongdoing, Jahn entered into a
settlement with OSHA that addresses the alleged work place safety
issues and agreed to pay $148,500 in fines, which is included in SG&A
for the three months ended September 30, 1999.
7. Third Amendment to the Credit Agreement
On August 20, 1999, the Company and its lenders entered into the Third
Amendment to the Amended and Restated Credit Agreement (the "Credit
Agreement"). This amendment provides that the Company's subsidiary,
Fonderie d'Autun ("Autun"), is not subject to the provisions governing
subsidiary indebtedness. It further provides that the Company and its
subsidiaries may not make any investment in Autun and the Company must
exclude Autun's results in the calculation of various financial
covenants.
8. Fourth Amendment to the Note Purchase Agreement
On October 20, 1999, the Company and the insurance company holding the
Company's $20 million aggregate principal amount of unsecured, senior
notes entered into the Fourth Amendment to the Note Purchase Agreement.
This amendment provides that the Company's subsidiary, Autun, is not
subject to the provisions governing subsidiary indebtedness. It further
provides that the Company and its subsidiaries may not make any
investment in Autun and the Company must exclude Autun's results in the
calculation of various financial covenants.
9. Fourth Amendment to the Credit Agreement
In November, 1999, the Company and its lenders entered into the Fourth
Amendment and Waiver (the "Fourth Amendment") to the Credit Agreement.
The Fourth Amendment provides, among other things, that the Company
maintain a ratio of earnings before interest, taxes and amortization to
fixed charges ("Fixed Charge Coverage Ratio") of at least 1.10 on
December 31, 1999, increasing to 1.25 on July 1, 2000, if the Company
incurs at least $20
million of subordinated debt by January 31, 2000. The Company
believes it will be able to obtain a commitment for the private
placement of such subordinated debt by December 15, 1999 and
complete the issuance of such subordinated debt by January 31, 2000,
but no assurance can be given that such a commitment can be obtained
or such a private placement can be completed on terms and timing
anticipated by the Company. Proceeds from the private placement of
such subordinated debt must be used to reduce up to $20 million of
outstanding borrowings under the revolving credit facility with any
remaining proceeds used to reduce the principal balance of the bank
term loan. If the Company does not complete the private placement of
at least $20 million of subordinated debt by January 31, 2000, the
Fourth Amendment provides that (1) the Company maintain a Fixed
Charge Coverage Ratio of at least 1.10 on December 31, 1999,
increasing to 1.25 on March 31, 2000 and 1.50 on March 31, 2001, (2)
the fixed charges used in calculating the Fixed Charge Coverage
Ratio will include 15% of the aggregate principal amount outstanding
under the revolving credit facility after October 1, 1999 rather
than after July 1, 2000, and (3) the Company will grant the lenders
under the Credit Agreement liens in the Company's assets by March
31, 2000, unless a commitment for such subordinated debt is not
obtained by December 15, 1999, in which case the liens must be
granted by February 14, 2000. The Fourth Amendment also provides
that the Company must maintain a ratio of consolidated total debt to
total capitalization of not more than 55% of total capitalization.
Loans under the Credit Agreement will bear interest at fluctuating
rates of either: (1) the agent bank's corporate base rate plus
0.25%, subject to a reduction of 0.25% (25 basis points) if certain
financial ratios are met or (2) LIBOR plus 2.10%, subject to a
reduction of up to 0.50% (50 basis points) if certain financial
ratios are met.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Net sales for the first quarter of fiscal 2000 were $109.7 million, representing
a decrease of $6.9 million, or 5.9%, from net sales of $116.6 million in the
first quarter of fiscal 1999. The operations acquired by the Company in fiscal
1999 generated net sales in the first quarter of fiscal 1999 and fiscal 2000,
respectively, as follows:
FY99 1st Qtr FY00 1st Qtr
Operation Date Acquired Net Sales Net Sales
- --------- --------------- ------------- -------------
London Precision Machine & Tool Ltd. 09 / 01 / 98 $2.3 million $5.6 million
Fonderie d'Autun 02 / 25 / 99 -- 3.9 million
Excluding net sales generated by the operations acquired in fiscal 1999, net
sales for the first quarter of fiscal 2000 were $100.2 million, representing a
decrease of $14.1 million, or 12.3%, from net sales of $114.3 million in the
first quarter of fiscal 1999. This 12.3% decrease in net sales was due primarily
to decreases in net sales to the offshore oil and gas, mining, power generation,
agricultural, petrochemical and steel markets, partially offset by an increase
in net sales to the rail market.
Gross profit for the first quarter of fiscal 2000 decreased by $1.2 million, or
8.6%, to $12.7 million, or 11.6% of net sales, compared to $13.9 million, or
11.9% of net sales, for the first quarter of fiscal 1999. The decrease in gross
profit and gross profit as a percentage of net sales was primarily due to lower
net sales and reduced absorption of overhead at the Company's subsidiaries which
primarily serve the mining, offshore oil and gas, power generation, steel and
agricultural markets.
Selling, general and administrative expense ("SG&A") for the first quarter of
fiscal 2000 was $9.8 million, or 8.9% of net sales, compared to $11.0 million,
or 9.4% of net sales, in the first quarter of fiscal 1999. The decrease in SG&A
expense and SG&A expense as a percentage of net sales is primarily due to the
consolidation of four operating units into two at the Company's Sheffield
subsidiary. Included in SG&A in the first quarter of fiscal 2000 was a charge of
$148,500 ($89,000 after tax) relating to fines levied by the Occupational Safety
and Health Administration ("OSHA") concerning an industrial accident at the
Company's subsidiary, Jahn Foundry Corp. ("Jahn") (see "Liquidity and Capital
Resources").
The Company has recorded intangible assets, consisting of goodwill, in
connection with certain of the Company's acquisitions. Amortization of these
assets for the first quarter of fiscal 2000 was expense of $374,000, or 0.3% of
net sales, as compared to $317,000, or 0.3% of net sales, in the first quarter
of fiscal 1999. The Company has
also recorded a liability, consisting of the excess of acquired net assets
over cost ("negative goodwill"), in connection with the acquisitions of
Canadian Steel Foundries Ltd. ("Canadian Steel") and Fonderie d'Autun
("Autun"). The amortization of negative goodwill was a credit to income in
the first quarter of fiscal 2000 of $531,000, or 0.5% net sales, as compared
to $60,000, or 0.1% of net sales, in the first quarter of fiscal 1999.
Interest expense for the first quarter of fiscal 2000 increased to $2.2 million
or 2.0% of net sales, from $2.0 million or 1.7% of net sales, in the first
quarter of fiscal 1999. The increase in interest expense reflects an increase in
the average amount of outstanding indebtedness primarily incurred to finance the
Company's acquisition of London Precision.
Income tax expense for the first quarter of fiscal 2000 reflected the combined
federal, state and provincial statutory rate of approximately 40%, partially
offset by a $87,000 tax refund at the Company's Sheffield subsidiary. Income tax
expense for the first quarter of fiscal 1999 reflected a rate of approximately
54%, which is higher than the combined federal, state and provincial statutory
rate because of the provision for tax benefits at lower effective rates on
losses at certain subsidiaries. The Company's combined effective tax rate
reflects the different federal, state and provincial statutory rates of the
various jurisdictions in which the Company operates, and the proportion of
taxable income earned in each of those tax jurisdictions.
As a result of the foregoing, net income for the first quarter of fiscal 2000
was $612,000 compared to net income of $337,000 for the first quarter of fiscal
1999. Excluding the charges related to the industrial accident at Jahn, net
income for the first quarter would have been $701,000.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities for the first three months of fiscal 2000
was $3.0 million, an increase of $4.0 million from the first three months of
fiscal 1999. This increase was primarily attributable to decreased working
capital requirements primarily relating to accounts receivable and inventory
balances.
Working capital was $87.0 million at September 30, 1999, as compared to $85.6
million at June 30, 1999. The increase primarily resulted from decreased accrued
expense balances, primarily relating to accrued vacation, and higher levels of
customer tooling projects.
During the first three months of fiscal 2000, the Company made capital
expenditures of $3.9 million, as compared to $6.9 million for the first three
months of fiscal 1999. Capital expenditures in both periods were used for
routine projects at each of the Company's facilities.
On August 12, 1998, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to 1.2 million common shares of its
then outstanding 8.2 million common shares. The stock repurchases may be made
from time
to time at prevailing prices in the open market or in privately negotiated
transactions, depending on market conditions, the price of Company's common
stock and other factors. The Company will make such stock repurchases using
internally generated funds and borrowings under its credit facility. The
Company's Note Purchase Agreement allows repurchases of up to nearly $2.5
million of Company common stock during fiscal 2000. Any share repurchases
will be added to the Company's treasury shares and will be available for
reissuance in connection with the Company's acquisitions, employee benefit
plans or for other corporate purposes. Through September 30, 1999, the
Company had repurchased 586,700 shares at a cost of $6.0 million.
The Company is currently contemplating the issuance of $20 million aggregate
principal amount of unsecured, senior subordinated notes through a private
placement, subject to market conditions. If consummated, the Company would
use the net proceeds of the offering to reduce outstanding borrowings under
its revolving credit facility.
Total indebtedness of the Company at September 30, 1999 was $115.2 million,
as compared to $113.4 million at June 30, 1999. This increase of $1.8 million
primarily reflects borrowings of $1.8 million to purchase the remaining 10%
of London Precision's outstanding capital stock. At September 30, 1999, $4.4
million was available for borrowing under the Company's revolving credit
facility.
An accident, involving an explosion and fire, occurred on February 25, 1999, at
Jahn, a wholly-owned subsidiary of the Company located in Springfield,
Massachusetts. Nine employees were injured and there have been three fatalities.
The damage was confined to the shell molding area and boiler room. The other
areas of the foundry are operational. Molds are currently being produced at
other foundries as well as Jahn while the repairs are made.
Although no lawsuits have been filed, a number of attorneys representing the
injured and deceased employees have contacted Jahn regarding possible
litigation. The Company carries insurance for property and casualty damages,
business interruption, general liability and workers' compensation for itself
and its subsidiaries. The Company, its property insurance carrier and its
insurance broker dispute the amount of property insurance available for
property damages suffered in this accident. If this dispute cannot be
resolved amicably, the Company would vigorously pursue its remedies against
both parties. The Company recorded charges of $450,000 ($750,000 before tax)
during the third quarter of fiscal 1999, primarily reflecting the deductibles
under the Company's various insurance policies. At this time there can be no
assurance that the Company's ultimate costs and expenses resulting from the
accident will not exceed available insurance coverage by an amount which
could be material to its financial condition or results of operations.
Following the accident, OSHA conducted an investigation of the accident. On
August 24, 1999, OSHA issued a citation describing violations of the
Occupational Safety and Health Act of 1970, which primarily related to
housekeeping, maintenance and other specific, miscellaneous items. Neither of
the two violations specifically addressing conditions related to the
explosion and fire were classified as serious or
willful. Without admitting any wrongdoing, Jahn entered into a settlement
with OSHA that addresses the alleged work place safety issues and agreed to
pay $148,500 in fines.
On August 20, 1999, the Company and its lenders entered into the Third
Amendment to the Amended and Restated Credit Agreement (the "Credit
Agreement"). This amendment provides that the Company's subsidiary, Autun, is
not subject to the provisions governing subsidiary indebtedness. It further
provides that the Company and its subsidiaries may not make any investment in
Autun and the Company must exclude Autun's results in the calculation of
various financial covenants.
On October 20, 1999, the Company and the insurance company holding the
Company's $20 million aggregate principal amount of unsecured, senior notes
entered into the Fourth Amendment to the Note Purchase Agreement. This
amendment provides that the Company's subsidiary, Autun, is not subject to
the provisions governing subsidiary indebtedness. It further provides that
the Company and its subsidiaries may not make any investment in Autun and the
Company must exclude Autun's results in the calculation of various financial
covenants.
In November, 1999, the Company and its lenders entered into the Fourth
Amendment and Waiver (the "Fourth Amendment") to the Credit Agreement. The
Fourth Amendment provides, among other things, that the Company maintain a
ratio of earnings before interest, taxes and amortization to fixed charges
("Fixed Charge Coverage Ratio") of at least 1.10 on December 31, 1999,
increasing to 1.25 on July 1, 2000, if the Company incurs at least $20
million of subordinated debt by January 31, 2000. The Company believes it
will be able to obtain a commitment for the private placement of such
subordinated debt by December 15, 1999 and complete the issuance of such
subordinated debt by January 31, 2000, but no assurance can be given that
such a commitment can be obtained or such a private placement can be
completed on terms and timing anticipated by the Company. Proceeds from the
private placement of such subordinated debt must be used to reduce up to $20
million of outstanding borrowings under the revolving credit facility with
any remaining proceeds used to reduce the principal balance of the bank term
loan. If the Company does not complete the private placement of at least $20
million of subordinated debt by January 31, 2000, the Fourth Amendment
provides that (1) the Company maintain a Fixed Charge Coverage Ratio of at
least 1.10 on December 31, 1999, increasing to 1.25 on March 31, 2000 and
1.50 on March 31, 2001, (2) the fixed charges used in calculating the Fixed
Charge Coverage Ratio will include 15% of the aggregate principal amount
outstanding under the revolving credit facility after October 1, 1999 rather
than after July 1, 2000, and (3) the Company will grant the lenders under the
Credit Agreement liens in the Company's assets by March 31, 2000, unless a
commitment for such subordinated debt is not obtained by December 15, 1999,
in which case the liens must be granted by February 14, 2000. The Fourth
Amendment also provides that the Company must maintain a ratio of
consolidated total debt to total capitalization of not more than 55% of total
capitalization. Loans under the Credit Agreement will bear interest at
fluctuating rates of either: (1) the agent bank's corporate base rate plus
0.25%, subject to a reduction of 0.25% (25 basis points) if certain financial
ratios are
met or (2) LIBOR plus 2.10%, subject to a reduction of up to 0.50% (50 basis
points) if certain financial ratios are met.
The Company believes that its operating cash flow and amounts available for
borrowing under its revolving credit facility will be adequate to fund its
capital expenditure and working capital requirements for the next two years.
However, the level of capital expenditure and working capital requirements
may be greater than currently anticipated as a result of the size and timing
of future acquisitions, or as a result of unforeseen expenditures relating to
compliance with environmental laws.
YEAR 2000 COMPUTER ISSUES
The Company has conducted a comprehensive review of its hardware and software
systems to identify those systems that could be affected by the "Year 2000"
issue and has developed an implementation plan to resolve the identified
issues. The Company believes that, with replacement or modification of its
existing computer systems, updates by vendors and conversion to new software,
the Year 2000 issue will not pose significant operational problems for the
Company's computer systems. The Company expects to complete implementation of
computer systems that are Year 2000 compliant by November 30, 1999, although
testing may continue until December 31, 1999 and thereafter. Based on its
review of non-information technology systems to date, the Company does not
anticipate the need to develop an extensive contingency plan for such systems
or to incur material costs in that regard.
The Company relies on a number of customers and suppliers, including banks,
telecommunication providers, utilities, and other providers of goods and
services. The inability of these third parties to conduct their business for a
significant period of time due to the Year 2000 issue could have a material
adverse impact on the Company's operations. The Company is currently assessing
the Year 2000 compliance of its significant customers and suppliers. To date,
the Company has been advised by over two-thirds of its significant customers
that they expect to be Year 2000 compliant by the end of calendar 1999. There
can be no assurance that the systems of other companies that interact with the
Company will be sufficiently Year 2000 compliant. The Company's reliance on
single source suppliers, however, is minimal, and the Company seeks to limit
sole source supply relationships. The Company, however, has entered into
national service agreements for the supply of certain raw materials and freight
service from single sources. If the Company does not identify or fix all Year
2000 problems in critical operations, or if a major supplier or customer is
unable to supply raw materials or receive the Company's product, the Company's
results of operations or financial condition could be materially impacted.
Year 2000 project expenditures to date total approximately $2.5 million. The
Company expects to incur an additional $200,000 of costs. The Company presently
anticipates that it will complete its Year 2000 assessment and remediation by
November 30, 1999. The Company currently believes that all facilities, excluding
Autun, is currently Year 2000 compliant. Autun is implementing a new system that
is expected to be completed by November 30, 1999. However, there can be no
assurance that the Company will be successful in implementing its Year 2000
implementation plan according to the
anticipated schedule due to the potential lack of availability of trained
personnel and their ability to identify relevant computer codes, among other
uncertainties.
FORWARD-LOOKING STATEMENTS
The sections entitled "Liquidity and Capital Resources" and "Year 2000 Computer
Issues" contain forward-looking statements that involve a number of risks and
uncertainties. Forward-looking statements such as "expects," "intends,"
"contemplating" and statements pertaining to the adequacy of funding for capital
expenditure and working capital requirements for the next two years are not
historical in nature. Among the factors that could cause actual results to
differ materially from such forward-looking statements include: the size and
timing of future acquisitions, business conditions and the state of the general
economy, particularly the capital goods industry and the markets served by the
Company, the strength of the U.S. dollar, Canadian dollar, British pound and the
Euro, interest rates, inflation, the availability of labor, the successful
conclusion of various union contract negotiations, the results of any litigation
arising out of the accident at Jahn, the competitive environment in the casting
industry and changes in laws and regulations that govern the Company's business,
particularly environmental regulations.
ITEM 3.
DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in
Item 7A of the Company's Form 10-K for the fiscal year ended June 30, 1999.
There has been no material change to that information required to be
disclosed in this Form 10-Q filing.
PART II
ITEM 1 - Legal Proceedings
NOT APPLICABLE
ITEM 2 - Changes in Securities and Use of Proceeds
Unregistered Securities Transactions
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 - Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
ITEM 5 - Other Information
NOT APPLICABLE
ITEM 6 - Exhibits and Reports of Form 8-K
(A) Exhibits
4.1 Fourth Amendment dated as of October 20, 1999 to the
Note Purchase Agreement dated July 29, 1994, between
the Company and Teachers Insurance and Annuity
Association of America
4.2 Fourth Amendment and Waiver to the Amended and
Restated Credit Agreement dated as of November 5,
1999, among the Company, the Banks party thereto, and
Harris Trust and Savings Ban, as Agent
27 Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1999.
* * * * * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATCHISON CASTING CORPORATION
(Registrant)
DATE: November 11, 1999 /s/ HUGH H. AIKEN
--------------------------------
Hugh H. Aiken, Chairman of the
Board, President and Chief
Executive Officer
DATE: November 11, 1999 /s/ KEVIN T. MCDERMED
--------------------------------
Kevin T. McDermed,
Vice President, Chief Financial
Officer, Treasurer and Secretary